Progress Report

WC Reform Impact Likely Modest in California

Experts say the latest round of WC reforms in California will not rival the success of reforms established a decade ago.
By: | May 30, 2014

The most recent and much-discussed reforms of the California workers’ comp system will “likely lead to only modest cost reductions and not rival the success of previous reforms established in 2004,” says a report from Fitch Ratings. Its analysis of the latest report on insurer experience projects just modest improvements in the system in the short term.

“The California Legislature passed numerous bills over time aimed at reforming the WC market,” the Fitch report says. “The most recent, Senate Bill 863, was signed into law Sept. 18, 2012, and while its full effect will likely be felt at year end, the current round of reforms will likely lead to only modest cost reductions and not rival the success of previous reforms established in 2004.”

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Based on the California Workers’ Compensation Insurance Rating Bureau’s recent Summary of December 31, 2013 Insurer Experience, the ratings company analysis also notes the “still poor performance” in accident year results. The WCIRB’s projected AY combined ratio of 113 percent represents “a substantial ultimate underwriting loss,” although Fitch also said it is a nearly 30 percent improvement since 2010. The combined ratio for 2012 is projected to be 123 percent.

“Reduced underwriting losses are tied to material recent premium increases, coupled with relative stability in indemnity and medical claims costs from history experience, offset by moderately higher claims frequency,” Fitch states.

The rating bureau projected indemnity claim frequency for AY 2013 to be 4.7 percent above the level for 2012 and 6.8 percent higher than 2011. The 2012 increase was believed attributable to increases in cumulative injury claims, permanent disability claims, claims involving injuries to multiple body parts, and claims from the Los Angeles/L.A. Basin regions, the bureau said.

Rates in the California workers’ comp market continue to increase. The bureau projected the industry average charged rate per $100 of payroll for 2013 policies to be $2.85, approximately 10 percent higher than the average rate in the second half of 2012 and 36 percent more than the average rate charged in 2009. However, it is still 55 percent less than the average rate charged for the second half of 2003.

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“Given the weak operating profitability of this line in 2013, workers’ comp insurance rates are still increasing. The WCIRB’s advisory pure premium rate increase at Jan. 1, 2014 of 6.7 percent signals market direction,” Fitch says. “Market underwriting results are likely to further improve in 2014, but a shift to an underwriting profit may prove elusive.”

Fitch also said several underwriters are continuing to view the market as a source for growth. “Companies with significant recent premium expansion include Berkshire Hathaway Inc., Amtrust Financial Services Group, and Employers Holdings Inc.,” it said. “Market leader, The State Compensation Insurance Fund, continues to lose share.”

Nancy Grover is the president of NMG Consulting and the Editor of Workers' Compensation Report, a publication of our parent company, LRP Publications. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]